What is a Tax Deed and How Does It Work?

Article Summary:

A tax deed is a legal document that changes ownership of a property to the government. This happens when the owner fails to pay property taxes. That home is then auctioned off at a tax deed sale, where the property is given to the highest bidder. There is usually a redemption period that allows the original owner to regain the home by paying off the unpaid taxes.

Ever wondered what would happen if you skipped out on your property taxes? Paying property taxes can be a pain sometimes, but not doing so could lead to a tax deed being placed on your home.

A tax deed is a legal record that transfers ownership of a home over to the government. This happens when the owner fails to pay property taxes. A tax deed allows the government to recover unpaid property and auction off the home at a tax deed sale. After the home is purchased by the highest bidder, the tax deed transfers ownership to them. However, many counties allow a redemption period. This allows the previous owner to earn the property back by paying the property taxes.

Some people are even tax deed investors. This article lays out everything you need to know about tax deeds, tax deed sales, and tax deed investing.

What is a tax deed?

A tax deed is a legal document granting ownership of property to a new owner. If the owner of a property fails to pay property taxes, the property is taken by the government. Tax deeds allow the government to sell the property and collect delinquent taxes. After the government sells the property, the tax deed transfers the ownership to the buyer of the home.

How do tax deed sales work?

A tax deed sale is when the property is sold to the public by the government through an auction. The minimum bid amount matches the amount of taxes owed, interest, and selling costs. The highest bidder wins the property.

The tax deed changes ownership to the winning bidder. That bidder is now the new owner and has to pay the entire amount in 48 to 72 hours. Failure to make the payment causes the sale to be canceled.

If the winning bidder pays more for the home than taxes owed, the extra amount is paid to the former property owner (if the owner requests it). The former owners have a time limit to when they can request these funds. It varies by state, but owners usually have around one to five years to request the money.

Redemption periods

The redemption period allows the original owners of the property to repay their tax debt and regain their home. This could prevent the highest bidder from becoming the owner, even after the tax deed sale. If the former owners fail to pay the property taxes owed during the redemption period, the home is given to the highest bidder.

What is the difference between a tax lien and a tax deed?

A tax lien certificate and a tax deed are two different things. However, a tax deed transfers ownership of the property to a new party. A tax lien certificate is a legal claim against the property when taxes aren’t paid. The property is sold in a tax deed sale. Tax lien certificates are sold at an auction instead of the actual property.

The government places a tax lien on the home if the owner fails to pay property taxes. The tax liens will then prevent the property owner from refinancing or selling the home.

Whether county and city officials respond to unpaid property taxes with tax deeds or with tax liens varies by state. Some states use both. If your state prefers tax liens, you may find this SuperMoney article informative.

What do property taxes cover?

A tax deed occurs when there are unpaid property taxes. Property taxes are valuable and cover the cost of public schools, fire departments, police departments, sanitation, public libraries, and more.

How to avoid property tax debt

If you don’t pay your property taxes, you could lose your home to a tax sale or foreclosure.

Homeowners who are struggling to pay their property taxes can sometimes reduce their tax bill or get extra time to pay. Talk to a real estate attorney or a tax attorney to find out what the best course of action is. If you are already facing a foreclosure, you might want to talk to a foreclosure lawyer to see what options are still available to you.

Ask for help from family or friends before the tax sale occurs. In some cases, you may be able to get a home equity loan or a mortgage refinance to pay your property taxes and lower your monthly expenses. However, this won’t work if you are already in foreclosure.

How to invest in a tax deed property

Tax deed investing is a niche but potentially very profitable investment. Real estate investors often buy homes from tax deed sales. These homes are usually cheaper than those sold on the open real estate market, making them an attractive investment.

Below are the steps tax deed investors take to invest in a property.

1. Pick a location

The county government conducts tax deed sales. Pick where to attend based on how frequently tax deed sales are held and what property is available. Some counties hold auctions quarterly or annually. Look for an auction that fits well with your schedule.

2. Learn the system of the area

The rules and organization of tax deed sales vary by state and county. Become familiar with the structure of the auction in the area you’re attending. For example, some counties reoffer homes at the end of auctions if they did not receive bids earlier.

3. Obtain a list of properties

It’s best to know as much as possible about the properties before the auction. Most county government agencies publish which properties are being auctioned in advance. They are usually published on the county tax collector’s website.

4. Learn about the properties

After obtaining a list of the properties up for auction, do your research. You should try to learn as much as possible about the properties being sold. Learn the starting bid price, property value, age and size of the property, and what the neighborhood is like. If you can, try to get a look at the houses before the auction.

5. Check on liens

See if any properties have liens on them. Some properties could have a tax lien, mortgage liens, or liens for unpaid municipal fines. In some counties, liens stay in place even after the ownership of the home has been transferred.

6. Attend the Auction

The county tax collector can usually tell you when and where an auction is. Some are online and others in person. Be prepared to pay for the home as soon as possible, and come with a cashier’s check.

Which states sell tax deeds?

There are three types of states when it comes to tax deeds. There are states that allow investors to buy tax deeds (listed below), which grants them ownership over the property. Then there are states that deal in tax liens, which don’t grant immediate possession of the property. Finally, there are hybrid states that permit the purchase of tax deeds, but also give homeowners the chance to pay the back taxes (plus interest) during a set redemption period. The list below includes tax deed and hybrid states.

Hybrid StatesTax Deed StatesTax Lien States
Rhode IslandMissouriKentucky
TennesseeNorth CarolinaMaryland
New MexicoMissouri
New YorkMontana
New HampshireNebraska
North DakotaNew Jersey
OhioNorth Dakota
South DakotaSouth Carolina
UtahSouth Dakota
WashingtonWest Virginia
Washington DC

Each state and county has its own system and rules set in place for tax deed sales. So, do your homework and learn how things work in your area before you start.

Why do people buy tax deeds?

Properties sold at tax deed sales are usually cheaper than those sold on the open real estate market. Many real estate investors attend tax deed sales for this reason.

Winning bid at auction: an example

Here’s a sample breakdown for a property with a $200,000 assessed value and $10,000 in back taxes. For simplicity, we’ll assume that the $10,000 in back taxes includes any fees or other charges added.

Assessed property value$200,000Quite a low price in some areas
Back taxes owed$10,000
Winning bid$110,000This is what the bidder must pay to get title to the property
County takes$10,000To cover back taxes
Original owner entitled to$100,000Winning bid minus amount to county
Bidder equity profit$90,000Assessed value minus winning bid

Key takeaways

  • A tax deed transfers the ownership of a home to the government body.
  • A tax deed sale auctions off homes that were taken by the government.
  • Tax lien certificates are made when there are unpaid property taxes on a home.
  • Many states have a redemption period, allowing the original owners of the home to pay off their debt and regain their property.
View Article Sources
  1. Steps to Invest in Tax Deeds — SF Gates
  2. Buying a House with a Tax Lien? Here’s What You Need to Know — SuperMoney
  3. Don’t Fall for This New Property Deed Scam — SuperMoney
  4. How To Lower Your Monthly Mortgage Payment — SuperMoney
  5. Information for Bidders — Treasurer-Tax Collector, San Diego County, California
  6. Tax Deed Sales — Clerk of Court & Comptroller, Hillsborough County, Florida
  7. What is a Warranty Deed and Do You Need One? — SuperMoney
  8. What is Property Tax Relief? Five Ways to Get it — SuperMoney
  9. Tax Deed States — Tax Title Services
  10. What Is A Participation Mortgage? — SuperMoney
  11. What Is a Grant Deed and How Does It Work? — SuperMoney